A small nation of ten people idolizes the TV show The Voice. All they produce and consume are ka

A small nation of ten people idolizes the TV show The Voice....

Key Concepts

Consumer Price Index (CPI)

The CPI measures the average change over time in the prices paid by consumers for a fixed basket of goods and services. It uses a predefined set of goods, held constant over time to provide a consistent measure of inflation experienced by households.

GDP Deflator

The GDP deflator is an index that represents the change in prices of all domestically produced goods and services in an economy. Unlike the CPI, it reflects the changing composition of the economy by using current production quantities as weights rather than a fixed basket.

Fixed Basket Approach

The fixed basket approach involves selecting a set of goods and services from a base period and using this same basket in subsequent periods to measure price changes. This method is central to the CPI, as it isolates price effects by keeping consumption patterns constant over time.

Measuring Inflation

Measuring inflation involves calculating the percentage change in a price index over time. The method chosen—whether using a fixed basket like the CPI or a variable basket such as the GDP deflator—can lead to different inflation rates due to variations in how each method weights and includes different components of the overall economy.

Transcript

00:01 So a small nation idealizes the tv show, the voice, and all the produce and consumes are karaoke machines and cd in the amount we're given for 2020 and 2021.

00:15 Now, the first question says using a method similar to the cpi, compute the percentage change in the overall price level, using 2020 as the base year, and fix the basket at one karaoke machines and three cds.

00:31 So, first of all, we need to know the two common factors we're going to know here is the cpi and the gdp deflator.

00:45 And the cpi is consumer price index and the gdp deflator is gdp deflator.

00:51 So we need to write the formula for the inflation rate first of all.

01:00 So inflation rate is equal to the price level.

01:08 At outcome b minus the initial price level divided by the initial price level multiplied by 100 over 1 so then the gdp fleta now the gdp price inflator is equal to the nominal gdp divided by the real gdp they multiply by 100 over 1.

01:59 So for the first question now, using the method similar to the cpi, which is consumer price index, calculate a percentage, the percentage change in the overall price level using 2020 as the base year and what to fix the basket at one karaoke and three cds.

02:27 So now we're going to start.

02:29 So the percentage change in the overall price level so fixing the basket i won karaoke and three series in your baskets the cost of baskets in 2020 would be the quantity of karaoke multiplied by the price of karaoke so k is k is cds so let's not get that confused so quantity of karaoke multiplied by price of karaoke plus quantity of cities multiply by price of cities so for 2020 the cost of basket of each good would be one because it's one for karaoke then multiply by 40 because the price is 40 as the question gives us then plus 3 multiplied by 10 so for 2020 it will be 40 plus 30 and then the cost of the baskets for 2020 would be $70.

03:54 Now for 2021, the cost of the baskets would be quantity of karaoke multiplied by a price of karaoke plus quantity of cds multiplied by, i'm sorry, that's a multiplication side, multiplied by a price of cds.

04:13 So this is equal to 1, multiplied by 60, which is for 2021, plus 3 multiplied by 12.

04:21 So this is equal to 60 plus 36 and the price of the cost of baskets is $96 for 2021.

04:33 So therefore the cost of baskets for 2020 is 70 and in the year 2021 is 96.

04:41 So and this is basket of goods.

05:07 So moving on, we're going to choose one year as the base here, which is the 2020.

05:12 I'm going to go to calculate the cpi.

05:16 So the cpi, which is consumer price index for 2020, is equal to the cost of basket goods in 2020, divided by the cost of basket goods in the base year, multiplied by 100.

05:46 So the cost of baskets in 2020, from what we did in the first one, is 70.

05:50 The cost of basiates in bayesian.

05:52 The base year is 2020, so that's 70, they multiply by 100.

05:56 And the cpi for 2020 is 100 now for 2021 the cpia will be the cost of basket goods in 2021 divided by the cost of basket goods in baysier multiplied by 100 over 1 so this equals 96 divided by 70 divided by 100 so this is equal to 96 divided by 100 so this is equal to 1 .37 for 2021 so therefore the cpr for 2020 is 100 and cpr for 2021 is wanted is going to be 1 .137 because you're multiplying by 100 so is one 107 so so moving on the presented change in the overall price level in 2021 will be equals to the inflation in 2021 and the formula would be the cpi of 2020 the cpi of 2021 divided by the cpi of 2020 multiplied by a hundred of a one so this is going to be equals to 137 divided by a hundred i'm sorry this has a minus 1 i'm so sorry minus 1 multiplied by 100 so this is equal to when you solve this out the inflation will be 37%.

08:23 So that means in the year 2021, the rate of inflation is 37 % in 2021.

08:43 So now moving on to the next question...

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